With our every changing world and market conditions it is increasingly important to measure your business’ performance on a regular basis. Knowing your business’ strength and weaknesses will help you manage it efficiently. Watch our video to learn how to measure performance and the tools and techniques to help you do this.
FINANCE
The first area is finance. One of the biggest challenges for any business is ensuring there is always enough cash to meet your expenses when they are due.
Cashflow
Regularly reviewing and updating your cashflow forecasts will show the money flowing in and out of your business. This is usually done on both a monthly and an annual basis. Updating your forecast regularly with actual figures should help you identify any potential problems in advance.
Profitability
Every business hopes to increase profits. Measuring profitability should highlight areas for potential growth or underperforming aspects of your business. Things to look at include:
- Gross Profit Margin – gross profit taken as a percentage of sales
- Break-even – the volume of sales needed to start making a profit
- Net profits – total sales less all costs including overheads, interest and tax
- Return on assets – the level of profit in relation to net assets.
Accounting Ratios
There are several key ratios in managing a business and give you a greater insight into your business’ performance;
- Liquidity ratios – measure your business’ ability to pay its debts, to calculate this you divide current assets by current liabilities
- Efficiency ratios – measure how well you are utilising your business assets, there are a variety of ratios you can use including debtor’s turnover, creditors turnover and stock turnover
- Gearing ratios – measures your business’ financial leverage, which is the level of long-term debt compared to capital in the business.
CUSTOMERS
Another important area to consider is customers.
Retaining existing clients is as important as attracting new customers. Reviewing your sales data as well as getting customer feedback is important to help you assess client satisfaction. Social media offers a platform to engage with customers and a website should also offer several ways for customers to get in touch. If your business is performing poorly clients may take the opportunity to formally complain but others will simply switch provider.
Engaging with clients can help your business identify how customers needs are changing and where improvements need to be made to products, services, staff or business procedures.
STAFF
A key part of any business is its staff. The more successful a business becomes the more staff you are likely to employ. Measuring their performance becomes an important consideration. Informal meetings and annual appraisals can offer practical ways to measure, monitor and develop staff. Targets and incentives can help ensure your teams are working efficiently. Another thing to consider is whether your staff reflect the ethos of your business, particularly in their dealings with customers on a daily basis.
BENCHMARKING
Benchmarking measures your company’s performance against rival companies. It enables you to find ways to improve performance, understand different approaches to achieve best practice or keep up with market trends.
Membership of a trade association may give you access to industry-wide statistics or you could purchase benchmarking data from industry-related groups. It is important to identify your main competitors and to measure your business’ performance against theirs. Benchmarking can help you identify what is driving success in your industry, it might be pricing, customer service or targeted marketing.
Strategic benchmarking goes one step further and looks at best-in-class performance in other industries and aims to transfer best practice to drive up standards in your own business sector.
MEASUREMENT METHODS
The two most commonly used measures are:
Key Performance Indicators or KPI’s:
These help you measure your business performance against key objectives. However, a word of caution, there are thousands of KPIs to choose from so it is vital to select the right one for the task.
KPIs are most commonly used to measure financial metrics such as profits, costs and sales. The key is to limit the number of KPIs to a manageable figure and focus on monitoring the ones that are vital to your business achieving its goals.
SWOT analysis
This measures four aspects of your business
- Strengths – what are you doing well?
- Weaknesses – identify areas in which you are not performing well
- Opportunities – are there any developments you can use to your advantage?
- Threats – factors which can have a negative effect on your operations
As markets evolve you need to regularly review and update your SWOT analysis. This can help you assess your business strategy to identify whether external factors contributed to business performance for example is poor performance the result of a downturn in market conditions.
To summarise the main areas to consider are:
- Finance
- Customers
- Staff
- Benchmarking and
- Measurement methods.
You can do all of these yourself, or you can ask your accountant to help you. I hope you found that useful. If you have any queries, please get in touch with us. We’d love to help.